Power Company Dividends

I’m very cynical of Labour’s new stance on state owned power company dividends. The reality is that during a period when the Government enjoyed massive and record surpluses, Labour took in hundreds of millions of dollar in dividends.

And then suddenly within a few months of losing office, they now say it is wrong to do so – at a time when the Government is now running massive and record deficits and any reduction in dividends would be far more difficult.

I’m not arguing for the energySOEs to price gouge – far from it. The sector needs reform. But there does need to be a return on capital that at least matches the cost of financing crown debt.

Labour also seems to be confused about the difference between dividends and retained earnings:

“Labour can and will stop price gouging. We will not demand excessive dividends coming back into state coffers above what is needed for investment in new generation.”

The dividends do not fund investment in new generation. It is almost the opposite. It is the amount of profit that you do not pay out in dividends that is used to fund new generation.

I’ve just added up the total net profit after tax for the six state owned energy companies for the last five years, and they were:

2004 – $406m

2005 – $561m

2006 – $1,230m

2007 – $622m

2008 – $451m

Total – $3.27b

So under the last five years of Labour, the state made a profit of $3.27 billion (after tax) from the energy sector. And again, this was at a time of record crown surpluses. I don’t have handy how much was paid as dividends, but people should remember the $3.27b when Labour go on about excessive profits. Over their total nine years, it might be as high as $5b.

Spam

gravedodger

I must be feeling charitable as I am going to conceed that the former hard working minister who sadly has had no business experience is genuinely in the dark about such things as return on capital and normal levels of profit and now he is the pro tem leader of the socialists and is not in need of unlimited sums of money to waste is just floundering about looking for a populist stance. He really does need to get out more and try to connect with people who understand business practice and then keep his mouth shut and risk being thought stupid rather than removing the doubt

I wonder whether your figures also include lines companies? Not sure of their ownership though.

And the problem with return on capital is that it assumes the capital is valued fairly. Using replacement cost as a capital valuation, for example, would put the power companies in balance sheet nirvana unmatched by private companies. Even worse is to use projected revenue to value assets, and then set prices (revenue) to get a return on that valuation – a circular process of ripping off the customer.

There is more than one way to rort the public.

[DPF: Very good comments on valuations. I guess what I would use is what price the Crown could get if it sold it and used the money to repay debt. The figures do not include lines companies]

Simon

Tom Semmens

Under Labour or National, the bills have got to be paid. The easiest way to get back the “tax cut” everyone thinks they got is to quietly hike power charges and pocket the dividend. What the government gives with one hand, it takes with the other. Gathering tax by this method is regressive and inefficient, but since the right work themselves into such a foam flecked hysteria over income tax it is politically expedient to do it this way rather than via an honest progressive income tax.

Komata

Perhaps someone can enlighten me – wasn’t it a Labour minister who introduced the whole privatisation of the electricity sector in the first place, ostensibly pursuit of ‘greater efficiency’, better use of resources, and ‘savings to the private consumer’?

IF it was (and my memory is a bit hazy on this – it was a long time ago), isn’t this something of a backdown (another admission perhaps?)

s.russell

I would have a major problem with SOEs effectively being run as non-profit Crown entities in competition with the private sector. It would be even more ridiculous (and unjust) than the Govt owning electricity companies in the first place.

emmess

burt

This highlights a major problem with the ideology of the left. Had private generators been making this kind of profit there would have been all sorts of screaming (nasty big business, greedy CEO’s – yada yada).

Sure the profits go to govt – but that makes no difference to the people struggling to pay their power bill and I don’t know why but I thought the left ideology was about looking after the people – But no – The govt always comes first to lovers of big govt.

peterwn

Lines companies – their profitability is based on the depreciated value of assets based upon replacement value and in some cases ‘redundant’ assets are excluded.

Generation companies – if the Government owned operate at other than a commercial rate of return, the non-government ones will stop investing. The Government ones will then have to provide the needed investment by forgoing dividends, and this will probably consume most of their profits – so there will be little left to sacrifice for lower power prices.

I do not believe the power generators are gouging. I do not believe that there are any significant inefficiencies in their operation, despite what Gerry and Bill say. Almost all ineffiviencies were wrung out of the companies long ago. The gouging claims seem to relate to:
1. Very high spot prices when generation is tight. This is precisely what is supposed to happen. Electricity consumption is quite ‘inelastic’ which is why spot prices rocket, because it takes a high spot price to start biting into consumption. Moreover backlashes against high spot prices and threats of regulation has discouraged the generators from installing cheap to build, expensive to run plant (ie gas turbines) because they are scard stiff that they will not be allowed to make a return on that investment. This is why Labour and the electricity commission stepped in and levied customers to provide such generation.

2. Holding back on hydro generation in late summer and autumn. They are accused of doing this to force up spot prices and hence increase profits. Thereality is that they do this to make sure there is sufficient water in the lakes to keep generating during the winter months. Meridiaj for example would be in deep trouble if it ran out of water in mid winter. Again this is precisely what is supposed to happen.

There is another matter. Subsidising electricity in any shape or form is not ‘green’. If the stuff is sold for less than commercial going rate, demand will increase requiring more generation. OK, there are stories of little old ladies staying in bed all day because they think they cannot afford to run heaters. This is a welfare matter and should be addressed as such possibly by MSD dishing out non tranferrable electricity vouchers when winters are colder than usual.

Out of interest can anyone enlighten me as to whether the CEO’s of any of the five ‘gentailers’ (three Govt owner and Contact and Trustpower) are Business Round Table members. I would doubt it judging by the crap that organisation puts out about the electricity industry.

burt

peterwn

Interesting that you suspect nasty Business Round Table members are behind the crap that is put out. Proves my point that some seem to think it is nasty big business and that is bad – while ignoring the role of the state in the same.

peterwn

burt – It is not the BRT members. It is Roger Kerr and the shonky consultants he engages who put out the pro market stuff about electricity. It is the BRT members (who are CEO’s of major companies) who squeal like stuck pigs when there is a shortage and the spot prices rocket to the moon. At such times the silence from Roger Kerr is deafening.

[DPF: I may be wrong but I thought the NZBR opposed the Bradford reforms.]

burt

Also true;

At such times the silence from Roger Kerr is deafening, as is the silence from the govt de-jour. Don’t recall much complaining from labour over the last 9 years about the profits…. platitudes about high cost but never once did they point the finger at the nasty profit taking CEO’s…. Of course the BRT was always being bagged for their part in the way it is structured but never (repeat never) confuse the type of structure with the actual implementation or some responsibility will need to be taken…. profits are for taking – blame is for others.

chiz

Komata:wasn’t it a Labour minister who introduced the whole privatisation of the electricity sector in the first place, ostensibly pursuit of ‘greater efficiency’, better use of resources, and ’savings to the private consumer’?

Max Bradford if I recall. National.

As to the reason, I’ve always had niggling doubts. It was clear at the time that new generation capacity was needed and the only way for the govt to pay for it was to raise taxes. I’ve always had a suspicion that the privatisation wasn’t driven by ideology as Bradford implied but by cynicism. The idea being that the govt privatises the industry. Industry then pays for the new generation capacity by raising prices. The govt leaves taxes alone and blames the price rises on the industry. The net result being that new generating plants are paid for by taxpayers but the govt, in theory, doesn’t receive the blame.

jag

“But there does need to be a return on capital that at least matches the cost of financing crown debt.”

Returns should always be set equal to a hurdle rate above the cost of ALL capital. Not just the cheapest form of capital (i.e. debt).

If returns are based on any other contrived method (i.e. anything that can be dreamt up by a certain failed history lecturer) then the government is failing in its most basic economic responsibility – ensuring the optimal use of resources within the economy.

peterwn

Answering various points:

DPF – Assuming NZBR had opposed the Max Bradford reforms, this was not inconsistent with the pure market philosophy that has consistently been pumped out by Roger Kerr and the authors of the various research reports on the electricity industry that NZBR has commissioned. At that time the late Wayne Gilbert CEO of Mercury (ie the old Auckland Electric Power Board) was a NZBR member and would have opposed the Bradford reforms. It was the electricity debacle in Auckland CBD that tipped the political scales towards acceptance of Max’s proposal, from what I remember it was touch and go with Cabinet and caucus. Wayne’s untimely death (heart problem) was caused as far as I can see by the stresses relating to the debacle. The cause of the debacle IMO was a series of engineering blunders over a few decades (in essence the 110kV cables could carry only half the load it was assumed they could carry), with Wayne and the Board being completely unaware of the ticking timebomb (alleged underinvestment was not the cause – the CBD supplies were known to be ‘tight’ but not in the critical state they were).

Chiz – the pre Rogernomics electricity arrangements were self financing. With a few odd exceptions the publically owned arrangements had never been a burden on the ratepayer or taxpayer. There was a potential burden in that if borrowing turned sour it would have had to be met from taxes / rates, but this never happened. The former Southland Electric Power Board did levy some rates in the 1930’s until the operation was nationalised (by mutual agreement) meaning it was cross subsidised from generation surpluses. The two big problemsthat arose in the 1980’s were:
1. Borrowing for electricity works was a very significant part of Government borrowing and there were very strong incentives to get this off the Government’s books and have it on the books of a company backed by the company’s assets. In 1984 overseas lenders were most concerned at the direction in which the NZ economy was heade4d.

2. The risk of over or under spending on generation was essentially a political risk. There were non-political structures in place but the politicians each year had to choose between conflicting views from the duly appointed taskforce ande the Treasury. The hope was that the risk could be passed to investors, but in pracice has remained a political risk.

Solid Energy Coal
Genesis Electricity Generation
Mighty River Power Electricity Generation
Meridian Electricity Generation
TransPower Electricity Transmission (marginal that this is really an energy company more an electricity transporter)
Who is the sixth?

[DPF: ECNZ. It is a residual company but still has $4 million or so assets]

peterwn

Just a few more comments about old Mercury in case I let the CEO and the Board off too lightly.

1. With corporatisation, there was a big cleanout of stores, the preference being to buy in stuff as needed. For convenience, spare parts and strategic items were included in stores systems. Mercury along with other power companies would have shrunk inventories and disposed of ‘slow moving’ stuff, and those who could defend retention were no longer there or were not listened to. Mercury was short of specialist materials for the repair of 110kV cables at the time and the stuff took ages to get from the UK.

2. Staff were also shrunk, with the thought that 110kV cable jointers could be brought in from Sydney as need be – at the critical time these Sydney based jointers were flat out on local work and were not available.

3. Transpower was suspicious of Auckland CBD supply capability, because at that time there was a significant of empty office space that could fill very quickly. Transpower offered to help with interim overhead lines some time before the debacle but Mercury declined.

4. The engineering side probably deferred as much capital spending as possible so there was money in the corporate war chest. Assuming the then Board chair can be believed (and I think he could) there was no ‘edict’ as such, but managerial staff would want to do what they could to help fulfil corporate objectives ie take over Power NZ who supplied North Shore and west Auckland.

As far as I know the residual ECNZ has nothing to do with energy, it has some financing activities relating to some ongoing contracts http://www.ccmau.govt.nz/ecnz.html. You can’t really count it as energy, however it’s contribution to your dividend list would be minimum as well